Negotiators from several countries have been working on an international trade agreement, the Trans-Pacific Partnership, which could establish regulations that affect many industries. The negotiation process has been going on in secret, but recently some information about this agreement has been leaked. The leaked documents include proposals which cover patents on prescription drugs, which could affect the bottom lines at Walgreen (WBA -0.23%), Rite Aid (RAD 5.26%), and CVS (CVS 1.15%).
Background
This trade agreement matters for pharmaceutical companies because they want to maintain their patents on drugs for as long as possible. Over the last few years, many patents on drugs have expired, which helps generic drug manufacturers but hurts the companies that originally patented these drugs. This trend has also meant better margins for major pharmacies, who have frequently discussed generic drug sales in their quarterly earnings releases.
The pharmaceutical companies want to protect their drugs from the generic drug manufacturers, and the leaked Trans-Pacific Partnership documents mention three ways that this could happen. First, the pharmaceutical companies could gain the right to apply for a new patent when they change the delivery method for a drug, which is called ever-greening. Second, the pharmaceutical companies could get the life of a patent extended if a drug took a long time to go through the regulatory process before it received approval. Third, generic drug companies could lose the right to use previous clinical trial data to argue in favor of their drugs.
These proposals haven't been finalized yet. Some of the countries which are involved in these negotiations oppose these drug regulation proposals. Nevertheless, the articles which discuss these leaked documents claim that these positions represent views from the United States, which may have a stronger negotiating position than other countries in the Trans-Pacific Partnership talks. United States-based pharmaceutical companies may benefit from these proposals, but their passage could have different effects on the drugstores.
Generics are still helping the drugstores
CVS had a good third quarter and it hiked its guidance, even though once again generics dragged down its top line to some extent. Specifically, CVS reported that pharmacy same-store sales rose by 5.7% including a 3.2 percentage point impact due to generic drugs. This means that if new generic drugs weren't introduced recently, CVS would have achieved 8.9% growth in pharmacy same-store sales, which would have been even more impressive.
Walgreen won't release its next quarterly report until December 20, 2013. It did release results for the month of October which show a solid performance, along with the effect of generic drug sales. Walgreen included an adjustment for the effect of a calendar day-shift which resulted in slightly higher pharmacy same-store sales. Including the shift, this figure was 8.4% for Walgreen which includes a 1.0 percentage point impact from generic drugs. Again, this means that without recent generic drug introductions, Walgreen would have had 9.4% pharmacy same-store sales growth, including the time adjustment.
Rite Aid's successful turnaround continued in October, although this pharmacy's numbers still aren't as impressive as the results from CVS and Walgreen. Specifically, Rite Aid reported that pharmacy same-store sales rose by 3.4% for the month. As with the other pharmacies, this figure was affected by recent generic drug introductions. Without that 0.85 percentage point impact, Rite Aid's pharmacy same-store sales would have risen by 4.25% for October.
My Foolish conclusion
The generic drug proposals in the Trans-Pacific Partnership agreement may or may not appear in the final agreement. Nevertheless, it is possible to understand what could happen if these proposals pass. If new rules delay the expiration of patents on prescription drugs, the impact of new generic drug introductions on same-store sales could decrease, sending same-store sales at CVS, Walgreen, and Rite Aid upward.
At the same time, delaying the expiration dates of generic drug patents could hurt these drugstores' bottom lines. This is especially important for Rite Aid because generic drugs were a major factor in this drugstore's return to profitability. As for overall impact, right now it looks like CVS is seeing the biggest hit to same-store pharmacy sales from generic drugs, which may mean that CVS is receiving the highest bottom-line boost from generic drugs as well.
Remember that even though pharmacies' same-store sales suffer because of generic drug sales, generic drugs still help these stores' margins. Investors who own shares of these drugstores or who are considering an investment in these drugstores should follow this story, because this agreement could affect financial results for all of these chains.
